Mining in Africa

Posted on March 23, 2018 · Posted in Accounting & Business

Mining has become increasingly important for African countries over recent years.  In the period 2001 to 2014, “extractive industries comprised two-thirds of Africa’s exports”, with “a surge in mine openings beginning in 2000”, according to a new report from the World Bank (Mining in Africa: Are Local Communities Better Off?).  This boom has led to a significant increase in African governments’ revenues, creating fiscal dependence on the commodities sectors – yet, says the World Bank, with little positive impact on poverty and living standards for their populations.

 

Much of the benefit of the mining expansion has instead gone to commodities companies (such as Glencore, see box) and their investors.  Across Africa, governments – including Mali, Nigeria, South Africa, Zimbabwe, Kenya and Nigeria – are keen to expand mining activities, with some also developing strategies to increase revenues from existing mines.  PwC pointed out in its just published report Two steps forward, one step back – the African tax landscape  that African countries now have unprecedented opportunities to generate much higher levels of revenues.  It explains: “we are seeing African governments increasingly looking for larger returns from mining operations in their country through increased taxes, royalties and/or increased free-carry stakes in the mines themselves.”

 

Tanzania has adopted a particularly aggressive approach.  President John Magufuli blocked exports of gold from Acacia’s operations in March last year, accusing the company of underpaying taxes due to the government.  Acacia denied this.  To settle the dispute, Barrick Gold – majority owners of Acacia – agreed to transfer ownership of three Tanzanian mines into a new company that is 16% owned by the Tanzanian government.  In addition, Acacia is to pay Tanzania US$300m, while Barrick Gold has committed to “total transparency” in its operations and maximising employment opportunities for Tanzanians.

 

Tanzania was also in dispute last year with Petra Diamonds, which the government accused of understating the value of exports.  This was denied by Petra, which said that government officials had monitored and valued the shipments out of the country.  Petra and the Tanzanian government reached a settlement at the end of last year, enabling exports to resume.

 

This hard line approach by Tanzania also involved significant tax increases on miners.  The royalty increased from 4% to 6% and tax allowances were made less generous.   PwC commented that the move had damaged the share price of companies involved in mining in Tanzania. “At a time when the mining industry has turned positive and with increased political stability in Africa as a whole, the timing of the Tanzanian tax changes may impede the recovery of the mining industry in that country,” argued PwC.

 

By contrast, PwC praised the approach of Namibia.  While its tax rates on mining companies are lower, it may be able to generate higher levels of revenues by its more welcoming attitude, suggested PwC’s report.  “Namibia has maintained its status as the most attractive destination of our sample countries for foreign mining investment capital,” said PwC.  It expects this to yield government revenues of $435m over the life of one mine, as well as FDI of $200m during the construction phase and $1.1bn in operating expenditure, with employment of 1,100 people.

 

But while it is important for governments to increase tax revenues from miners, it is also essential that governments and corporations eliminate the corrupt payments that have blighted the sector.  One of the clearest examples of improper behaviour involved the actions of a New York based hedge fund, Och-Ziff.  Just over a year ago Och-Ziff agreed to pay a criminal penalty of US$213m to settle charges brought by the US Department of Justice which alleged that the firm and its subsidiary OZ Africa Management had been engaged in the widespread bribery of officials in the Democratic Republic of Congo and in Libya.  “In its pursuit of profits, Och-Ziff and its agents paid millions in bribes to high-level officials across Africa,” said the DoJ’s principal deputy assistance attorney General David Bitkower.  He added: “Despite knowing that bribes were being paid to senior government officials, Och-Ziff repeatedly funded corrupt transactions.”

 

The Democratic Republic of the Congo features repeatedly in investigations into corruption, including in the recently published Paradise Papers.  DRC is the largest producer of copper in Africa and the world’s largest supplier of cobalt, used extensively in lithium batteries. Yet DRC is one of the world’s poorest countries in the world and claims by Amnesty International that child labour is used in the mining of cobalt in the DRC are currently being investigated.

 

The Africa Progress Report 2013, chaired by former UN secretary general Kofi Annan, provided detailed analysis of the impact on Africa of poor value mineral concession contracts.  “Many countries – the Democratic Republic of the Congo is a stark example – are losing revenues as a result of weak management of concessions, aggressive tax planning, tax evasion and corrupt practices,” said the report.  “With some of the world’s richest mineral resources, the DRC appears to be losing out because state companies are systematically undervaluing assets. Concessions have been sold on terms that appear to generate large profits for foreign investors, most of them registered in offshore centres, with commensurate losses for public finance.”  The report concluded that in the period 2010 to 2012, the DRC lost at least US$1.36bn in revenues through the undervaluing of mining assets sold to offshore companies – equivalent to twice the DRC’s annual budget for health and education combined.

 

This evidence feeds into a narrative that has been put forward by various charities and lobby groups, including Oxfam and Global Witness, which argue that Africa’s mineral wealth is being exploited on unfair terms.  A comprehensive study was published just over a year ago by Global Financial Integrity and the Centre for Applied Research at the Norwegian School of Economics.  This concluded that not only are some minerals extraction companies not paying full market prices for mining rights, but they avoid tax liabilities on the profits through the use of offshore financial centres.  The report (Financial Flows and Tax Havens: Combining to Limit the Lives of Billions of People) concluded that “since 1980 developing countries lost US$16.3trn dollars through broad leakages in the balance of payments, trade misinvoicing, and recorded financial transfers”.

 

These lost revenues are vastly more than the aid provided by developed nations to Africa calculates GFI.  Consequently, the financial flows are making poverty in Africa worse, not better.  In the words of GFI president Raymond Baker: “There is perhaps no greater driver of inequality within developing countries than the combination of illicit financial flows and offshore tax havens.”

 

Box

 

Glencore

 

Glencore is one of the world’s largest companies, as well the largest commodities dealer.  It has revenues that are three times the size of those of the next largest mining operator BHP Billiton and four times the size of the third largest, Rio Tinto.  Yet it is a young company – established by commodities trader Marc Rich in 1974 as Marc Rich + Co AG.  It has mining and mineral interests in Zambia (copper), Namibia (zinc) and South Africa (alloys and coal), with a controlling interest in Katanga Mining, which mines copper and cobalt in the DRC.  Glencore was named in the ‘Paradise Papers’, but in a long statement it said that it complies with its tax obligations in all countries in which it operates, publicly discloses its payments to governments and reporting disclosures are aligned with the EU Accounting Directive.  Glencore reported profits of $1.38bn on revenues of $152bn in 2016, following a reported loss of $5bn in 2015.